CEO Coaching: 3 Minutes of Value

“If you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”

—Peter Lynch

Lynch was referring to the ability of economics to predict recessions, and he’s mostly right. However, one thing I regret about my formal education is not studying economics more. I had a course or two in graduate school but wasn’t dialed in enough then to realize that economics is something more than social science, and it can be more valuable than assertions of the latest management guru. 

Economics doesn’t predict everything well any more than your primary care physician gets diagnoses correct. It does, however, provide us with “laws” that are perhaps not as sound as gravity but more prescriptive than the “instinct” most of us rely upon. Business leaders (and, even more so, politicians!) are wise to develop some understanding of this science.

Below are a few economic principles I see disciplined leaders use to their benefit. (I’m a business guy, not an economist, so I won’t let precise definitions get in the way of my story!)

There are unintended consequences and trade-offs with all decisions

Much of my work with CEOs is around people and strategy. The decisions they make in those areas are never in a vacuum and have unintended consequences. The smartest leaders understand (and take the time to articulate) that every objective or plan they set means they’re trading one decision for another. (By the way, there are consequences to not doing things as well!) Often the best way to use this concept is simple; just ask, “What are the unintended consequences of this action or decision?”

Incentives work (and have unintended consequences)

If you want someone to do “x,” make sure they aren’t rewarded for doing “y.” I often find that when leaders are frustrated with behavior (of their coworkers, vendors, or customers), it’s because the desired behaviors and incentives aren’t aligned. Compensation plans, feedback practices, commission structures, discounts, etc., may start with a gut feel, but the smartest leaders go well beyond that to consider (and even test) the full measure of those programs. (This is another one that politicians frequently get wrong!)

Centralized vs. local planning and control is a critical decision

Ronald Reagan told a joke that highlights the inefficiencies of centrally controlled economies, but it also applies to companies. A guy goes in to buy a car in the Soviet Union and is told that even though the cars aren’t well-made, and he has to pay up front, there’s a 10-year wait. He plunks down the cash, and the bureaucrat tells him to come back in 10 years. “Morning or afternoon?” the gentlemen asks. “What’s the difference! It’s 10 years from now!” says the bureaucrat. “Well, the plumber is coming in the morning,” responds the gentleman. 

Centralized economies (e.g., the Soviet Union—now Russia, Cuba, Venezuela) kill innovation and initiative. Some of the same problems occur in companies that make all the decisions at the top. Many of the smartest leaders I’ve worked with have pushed as many decisions as optimal toward those who understand the market the best. (I wrote about this here with some guidelines.)

Sunk costs create bad decisions

I recently paid a princely sum, in full, for a development program. After a couple of months, I realized I was getting little value. I had four more sessions, so it made sense to just finish it out, right? Wrong! At that point, the only decision was, “Do I invest time in something that’ll bring little or no value when I could do something else with more utility?” The money I spent (sunk cost) was painful but shouldn’t be considered for my future action. 

The smartest leaders manage the political and emotional ramifications of sunk costs and only look forward. Look at future cash flows, not historical spending. Don’t throw good money (or time) after bad!

Comparative advantage is an advantage

When I bought my first home, I tried doing my own plumbing and lawn care. (Now that I think of it, my wife used to cut my hair!) My income was low enough that it made sense to save a few cents wherever I could. I now have many other uses of my time that are more valuable than fixing a plumbing problem that gives me no joy.

Going head-to-head with a competitor who produces a product cheaper or better is foolish. You can’t win. You might also consider parts of your business that you could source from a more competent provider. Do what you do best.

This probably took you three minutes to read. So, according to Peter Lynch, you’re done with economics for the year. However, the marginal utility of another 10 minutes to see how economics would help you run a better company might provide good marginal utility. At least more so than mowing your lawn—don’t do that unless it gives you great joy!

Bonus joke for reading to the end: Two economists were sitting at a nudist colony. The one said, “Have you read Marx?” The other says, “It’s these wicker chairs.”

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